Educational Articles

Stock Screen: Technology Stocks That Pay Dividends - March 22, 2013

Kevin Downing
| March 22, 2013

Technology isn’t usually a space investors associate with dividends. While this has been the case historically, dividend payments have been cropping up in recent years. Although many companies in this space still don’t pay dividends, there are some that have handsome distributions on both an absolute and a relative basis.

We screened the Computer Software, Computers and Peripherals, E-Commerce, Electronics, Entertainment Technology, Foreign Electronics, Internet, Semiconductor, and Telecom Equipment Industries for companies in the technology area that pay material dividends. First, we looked for companies with dividend yields above 1.5% and then, to help ensure the dividends were sustainable, we limited the results to those corporations with long-term debt as a percentage of total capital below 25%.

The screen, simple as it is, netted 32 companies (see the list below) with yields ranging from just about 1.5% to above 5%. Long-term debt-to-total capital ratios ranged from nil to near the 25% limit. There was no particular correlation between debt and distribution. Of note, however, is the fact that yields drop quickly toward the market average—not surprising given the nature of the industry. We have chosen to highlight IAC/InterActiveCorp (IACI)for its solid dividend and appealing capital gains potential.

IAC/InterActiveCorp

IAC is an Internet company with more than 150 brands and products focused in the areas of search, applications, online dating, local businesses, and media. Its Web properties include Ask.com (answer engine), About.com (information from freelance subject matter “experts”), Match.com (online dating), Vimeo.com (video hosting), Dictionary.com, and TheDailyBeast.com/Newsweek. Each month, IAC’s websites average more than one billion visits across 30+ countries. In 2012, the Search & Applications unit generated 55.5% of the company's operating income before amortization (OIBA, the preferred reporting metric), followed by Match with 40%, and Local with 4.5%. The Media unit recorded a loss last year that was 8% of the OIBA.

Revenue from the Search & Applications segment is derived from online advertising on Websites and toolbars. Pursuant to an agreement, AIC transmits search queries to Google (GOOG), which then transmits a set of relevant and responsive paid listings back for display in its search results. The company believes it differentiates Ask.com from competitors through question and answer services that “provide accurate, authoritative and direct answers to natural language questions.” Revenue from the Match.com and other dating websites is primarily generated through subscriptions, with the exception of OkCupid.com which also uses online ads.

The Search and Applications unit ended 2012 with a strong showing as OIBA and revenues advanced 40% and 20%, respectively. The number of searches was up 18% year over year. We believe this reflects a growing desire for quick answers to simple “common language” questions from a user base that is reported to be relatively-less educated than those of competing search engines. Currently, only around 7% of Ask.com queries are done on mobile devices (compared to 20% of About.com’s and 40% of Dictionary.com’s), which we attribute to the tendency for its users to be late adopters. The company is focused on ramping up its distribution and marketing on these platforms. We also think desktop activity will decline at a slower rate than the broader industry.

Other areas of concern are new ad policies from Google that affect the marketing of Ask.com products. Although the most impact will be felt in the current quarter, that particular partner is only responsible for 12% of the unit’s revenue. Some investors have also said new browser changes will reduce the number of toolbar downloads. The company responded by saying it generally sees some negative results immediately following changes, but its engineers have always found ways to adapt. Lastly, some have questioned the value of certain IAC applications. We disagree, and think niche audiences like television and retro video game fanatics will continue using these so called “digital snacks” at profitable levels. The company expects revenues in the Search and App. Business to grow in the high double digits in 2013.

Another unit with strong potential growth opportunity is the online dating unit, led by Match.com, which had 4% subscriber growth in the fourth quarter. Although this rate was solid, it may well improve over the near term. Indeed, IAC is differentiating its service by hosting physical events where members can meet up and converse while enjoying various activates. The company expects to host 40% more events in 2013 than the annualized rate achieved in the second half of 2012. Long-term drivers include a growing population of single people and a lower stigma against online dating. The company claims that 50% of the 100 singles in America are currently open to online dating, and the addressable market should increase 21% to 31% by 2017. IAC looks to diversify its price range to upsell those looking for a more elaborate experience and downsell those unwilling to pay a flat fee they view as expensive. Finally, expansion into Europe ought to contribute to the bottom line, and we would not be surprised if the company made some acquisitions in that space.

The company’s dividend yield is currently 2.2% which is relatively healthy for a technology equity. Although payments only commenced in late 2011, they have already doubled, and we expect growth to continue.

Like most Internet companies, IAC shares are not without risk. The search business faces extremely difficult competition but continues to grow and appears to be sufficient for the needs of its users. The best-in-class Match unit should continue expanding, and we think investors' concerns over the toolbar and application businesses may be somewhat unwarranted. The company’s attractive valuation may interest risk-tolerant value investors, in our view.

Company

Ticker

Industry Name

Dividend Yield

CA, Inc.

CA

Computer Software

3.92

Compuware Corp.

CPWR

Computer Software

4.15

Microsoft Corp.

MSFT

Computer Software

3.27

Apple Inc.

AAPL

Computers/Peripherals

2.45

Western Digital

WDC

Computers/Peripherals

1.97

AVX Corp.

AVX

Electronics

2.67

Micrel Inc.

MCRL

Electronics

1.59

Molex Inc.

MOLX

Electronics

3.04

Daktronics Inc.

DAKT

Entertainment Tech

2.28

Canon Inc. ADR

CAJ

Foreign Electronics

4.19

FUJIFILM Hldgs. ADR

FUJIY

Foreign Electronics

2.31

Hitachi, Ltd. ADR

HTHIY

Foreign Electronics

2.26

Konami Corp. ADS

KNM

Foreign Electronics

3.91

Kyocera Corp. ADR

KYO

Foreign Electronics

1.6

Philips Electronics NV

PHG

Foreign Electronics

3.33

Sony Corp. ADR

SNE

Foreign Electronics

1.75

IAC/InterActiveCorp

IACI

Internet

2.21

Analog Devices

ADI

Semiconductor

2.92

Avago Technologies

AVGO

Semiconductor

2.07

Intel Corp.

INTC

Semiconductor

4.16

Intersil Corp. 'A'

ISIL

Semiconductor

5.35

Maxim Integrated

MXIM

Semiconductor

2.88

NVIDIA Corp.

NVDA

Semiconductor

2.35

STMicroelectronics

STM

Semiconductor

5.2

Taiwan Semic. ADR

TSM

Semiconductor

3.05

Tessera Technologies

TSRA

Semiconductor

2.16

Xilinx Inc.

XLNX

Semiconductor

2.57

ADTRAN, Inc.

ADTN

Telecom. Equipment

1.78

Cisco Systems

CSCO

Telecom. Equipment

2.59

Ericsson ADR

ERIC

Telecom. Equipment

3.16

Marvell Technology

MRVL

Telecom. Equipment

2.21

Qualcomm Inc.

QCOM

Telecom. Equipment

1.58

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.